Demand management—fiscal policy Paper 1| IBDP Economics HL |

IBDP Economics HL – Macroeconomics – Demand management—fiscal policy -Paper 1 Exam Style Practice Questions

Exam Style Questions..

IBDP Economic SL- All Topics

Question

Evaluate government policies to deal with the different types of unemployment.

▶️Answer/Explanation

Answers may include:

definitions of government policies and frictional, structural, seasonal and cyclical (demand-deficient) unemployment
diagrams might include AD/AS showing how government policies can increase AD leading to an increase in real GDP and/or a diagram to show how an increase in AD can reduce structural unemployment and the natural rate of unemployment
explanation that fiscal, monetary or supply-side policies can all be used to reduce the different types of unemployment. Outlining the transmission mechanism involved
examples of situations where a country has reduced a type of unemployment
synthesis or evaluation.

Question

Using the concept of the multiplier, explain how an increase in investment might affect aggregate demand.

▶️Answer/Explanation

Answers may include:

definitions of investment, aggregate demand, multiplier
diagram to show the impact of the multiplier on AD
explanations that investment is one of the components of the aggregate demand and of the multiplier effect
example(s) of where an increase in investment has affected AD through the multiplier effect.

Question

Explain the effect an increase in investment might have on real gross domestic product (GDP) using the Keynesian multiplier.

▶️Answer/Explanation

Answers may include:

definitions of real GDP, investment, Keynesian multiplier
Keynesian AD/AS diagram to show the multiplier effect (successive increases in AD and real GDP)
explanation of how an initial increase in investment, a component of AD, leads to multiple successive increases in AD and real GDP
hypothetical numerical example(s) to support the explanation or a historical example of specific situations where an increase in investment has possibly led to a multiplier effect.

Question

Using real-world examples, evaluate the effectiveness of monetary policy to achieve low unemployment.

▶️Answer/Explanation

Answers may include:

Definition: monetary policy, low unemployment.
Explanation: of the impacts that might occur on the economy as a result of its use on employment, growth, inflation and trade.
Diagram: AD/AS diagram.
Synthesis (evaluate): strengths and limitations of monetary policy in achieving low unemployment. Monetary policy is incremental, easily changed, flexible, fast to implement, does not burden the government’s budget; it is less effective with close to zero interest rates, and ineffective when business/consumer confidence is low; effectiveness may depend on the type of unemployment.
Examples: real-world examples where governments have attempted to lower unemployment using monetary policy.